Will Insurable Interest Case Be Sea Change Or Mere Ripple? Estate
planning could be altered in many states
by Jim Connolly

Will a Maryland
court case turn out to be a sea change or merely a ripple?

Those watching a case currently before the Court of Appeals in Richmond, Va.,
seem to be divided on the impact on the estate planning market and
professionals who sell products in that market, according to interviews with National
Underwriter.

The case, Vera Chawla v. Transamerica
Occidental Life Insurance Company, addresses the issue of whether a life
insurance trust has an insurable interest in the life of a decedent. An opinion
issued by United States District Judge Claude Hilton in the Eastern District of
Virginia, argues that under Maryland
law, such a trust does not have an insurable interest. The opinion could impact
such trusts in states with laws similar to Maryland.

The American Council of Life Insurers, Washington, says about 30 states have
laws similar to Marylandís.

The policy was sold in Virginia, but the
plaintiff, Vera Chawla, lived in Maryland
where the policy was delivered, so Judge Hilton applied Maryland law.

The case addressed two issues: misrepresentation on the application and the
insurable interest of a life insurance trust.

Harold Geisinger applied for a $1 million life
insurance policy on May 4, 2000, in which he named Chawla
owner and beneficiary. Transamerica Occidental refused to issue the policy
because of a lack of insurable interest. Geisinger
then changed the proposed owner and beneficiary to the Harold Geisinger Special Trust, naming both Chawla
and himself as trustees, the opinion states.

According to the court opinion issued on Feb. 3, Geisinger
did not detail his health in the application, failing to note health concerns
including "a diagnosis of chronic alcohol abuse" and surgery in which
"doctors inserted a shunt into his head to drain the excess fluid that had
accumulated after his brain surgery." The opinion also states that Chawlaís husband, a physician, conducted the physical
examination.

In September 2000, Chawla applied to increase the
face value of the policy from $1 million to $2.45 million, the opinion states.

Geisinger died on Sept. 23, 2001.

Judge Hiltonís opinion states that the trust must prove an insurable interest
in the life of the insured and Chawla failed to
demonstrate such an existence as defined by Maryland statute.

"We believe that because this particular decision was based on facts
unique to this case, it does not call into question the insurable interest in
policies owned by trusts," says Bill Tate, senior vice president and chief
marketing officer, Transamerica Occidental Life Insurance Company, Los Angeles.

"This case involved a situation where an individual applied for a life
insurance policy and was found by Transamerica not to have an insurable
interest in the proposed insured," Tate continues. "When the
application was turned down on this basis, a trust was then utilized in an
apparent attempt to provide for an insurable interest.

"Under this trust, this individual was the sole beneficiary of the life
insurance benefits. In the context of this case, this individual had no
insurable interest and the use of a trust in this way did not provide one.

"Transamerica does not view this ruling as having any application to
trusts generally, including those set up for estate planning purposes,"
Tate says.

Although the facts surrounding the case are "somewhat unique," the
opinion could be read broadly, according to Phil Stano,
a partner with Jorden Burt, LLP, a Washington, D.C.,
law firm. There is not a lot of case law on the issue
of insurable interest in Maryland,
he continues.

The Fourth Circuit Court of Appeals usually acts quickly and "if they
breathe life into the case," then it could impact agents and estate
planners, he adds. "It could be a land, air and sea change."

Agents and estate planners want assurances now, Stano
says, and for good reasons.

If trusts are not allowed to be used in some states, then "potentially,
the estate would be looking for someone to cover the loss if advice had been
given," Stano cautions.

Jack Dolan, an ACLI spokesman, says the courtís decision is specific to one
case. "The courtís decision on the trust issue is specific to the facts of
a particular case when the court decided that it didnít have an insurable
interest. It did not signify in general that trusts did not have an insurable
interest. It said a specific trust did not have an insurable interest."

ACLI says it does not plan to file an amicus with the appellate court.

Ted Kurlowicz, an attorney and a professor in estate
planning and taxation with the AmericanCollege, Bryn Mawr, Pa.,
says he is not concerned that the decision will limit the use of life insurance
in trusts. He says the court was trying to react to a specific set of facts.

If the decision was applied more broadly, Kurlowicz
continues, he believes there would be a number of remedies for insurers and
producers. Insurance is regulated by states, and if it is perceived that there
is a problem, then amendments could be proposed at the
state level to change insurable interest laws, he says.

Other possible solutions include adding a savings clause to a trust that would
ensure that true beneficiaries are recognized, according to Kurlowicz.
It has to be made clear that the true purpose of the trust is for the
beneficiaries even if the trust is considered an entity and a taxpayer.

A trust protector can be added to a trust so that the terms of the trust can be
amended to reflect the stateís insurable interest laws, he adds.

Although he reiterated that he is not concerned about the use of life insurance
in a trust, particularly, if it is established by a couple to provide for
children or grandchildren, he did say it could be a "closer question"
if a trust were established by an aunt or uncle for a niece or nephew or if the
relation were not a direct descendant.

Kurlowicz says the reasoning applied to the insurable
interest argument in the Chawla case could be used in
the argument over expanding insurable interest laws for investor-owned life
insurance. The ACLI says there is no application to the IOLI argument.

In the Chawla case, the ultimate beneficiary is
someone who lacked an insurable interest from the outset, says Tom Korb, director of government affairs with the Association
for Advanced Life Underwriting, Falls
Church, Va.

In the vast majority of cases, there is an insurable interest, Korb says. In almost all cases, he continues, family
members are beneficiaries of a trust.

When asked about the potential effect on producers if the appeals court affirms
the lower court decision, Korb declined to comment on
what at this point is a hypothetical situation.

Korb says he does not know if AALU intends to file an
amicus brief with the appeals court.